It has been a grueling year for stock market investors with the broad S&P 500 index declining 18.3% from previous highs and flirting with bear market territory. Those who are heavily invested in the technology sector are already battling the bear, with the Nasdaq-100 down over 29% from its all-time high.
Many popular individual tech stocks that had soared over the last two years have fallen even further than the Nasdaq overall, in some cases losing more than 80% of their value. Buy now, pay later powerhouse Affirm Holdings (AFRM -2.08%) is one of them. Its stock is down 87.2% since logging its all-time high of $176.65 in November 2021
The thing is, Affirm's underlying performance of its business doesn't quite marry with the market's pessimism. Here's why this stock has real potential for a comeback.
Affirm does have some challenges
A hallmark of the current tech sell-off is the relentless decline in value of companies that don't generate profits. Companies lose money for a number of different reasons, but in the case of technology growth stories like Affirm, it's often because they're still in the scale-up phase. The primary goal is to acquire customers and generate revenue before cutting back on aggressive expenditure over the long run to finally deliver profits.
In fiscal 2021 (Affirm's fiscal year ends June 30), Affirm lost $430 million, and it's in the red to the tune of $521 million so far in the first nine months of fiscal 2022. The company is already losing more in fiscal 2022, which is a concern.
Affirm's business model is built upon a new form of short-term installment lending known as buy now, pay later. Its technology integrates with the online stores of its merchant partners to allow consumers to finance their purchases at the checkout, with no credit card required. Terms for these temporary loans range from six weeks to 60 months, with an interest rate of between 0% APR and 30% APR.
With interest rates rising (the Federal Reserve recently increasing the benchmark by 0.5 percentage points), investors have increased concerns that Affirm's users will have more trouble paying back their loans and Affirm's losses will increase. In the third quarter of 2022 (ended March 31), Affirm set aside $159 million for credit losses, a 35% year-over-year jump. That's not a popular statistic among investors. In cases where Affirm needs to use debt financing to fund loans, its gross profit margin on those loans will likely shrink because the difference between the interest it pays and the interest it charges customers will be narrower.
But there's a booming underlying business
While the bottom line is messy at the moment, there's a unique growth story that deserves recognition. According to estimates, buy now, pay later is the fastest-growing payment method in the $10 trillion global payments industry. There are now 12.7 million active customers using Affirm, and that figure is growing by triple-digit percentages over the last several quarters.
Those customers have generated a total transaction value of $13.6 billion over the last 12 months, and thanks to a blockbuster partnership with e-commerce giant Shopify (SHOP 2.34%), the number of merchants now integrating Affirm into their online checkouts climbed to 207,000 in fiscal Q3 -- a whopping 1,698% year-over-year increase.
In the first nine months of fiscal 2022, these results have helped Affirm deliver $985 million in revenue, a 61% jump over the year-ago period.
And it could get better
Shopify has over 1.75 million potential merchants in its network, so adoption of Affirm is still in the early stages with plenty of potential growth ahead. But of greater significance could be Affirm's more recent deal with global e-commerce leader Amazon (AMZN 1.83%), which has begun to offer Affirm's buy now, pay later service to its customers.
Amazon generated over $340 billion in global e-commerce sales in 2021, so considering Affirm's trailing 12-month gross merchandise value is just $13.6 billion, there could be room for 25-fold growth in the long term.
Both of these major deals should help Affirm achieve scale in the long run, which would see fixed costs fall as a percentage of total revenue, in turn paving the way for profitability. In the shorter term, the company's strong fiscal Q3 result prompted it to raise its full-year fiscal 2022 guidance. It now expects up to $15.1 billion in gross merchandise value for the year, up from previous guidance of $14.7 billion, and up to $1.34 billion in revenue, an increase from $1.31 billion.
The company also has a long runway to manage losses, with over $2.2 billion in cash on its balance sheet in addition to $2.5 billion in loans due to be repaid to Affirm from its customers.
With Affirm stock down 87% from its all-time high amid the broader tech sell-off, now might be a great time to build a position.